Taking Credit

The impetus of financial institutions offering a wide range of financial products and services through electronic distribution channels appears unstoppable, helped by improvements in technology and security and by the rapid growth in usage of the Internet.

Like the proverbial Town Mouse and his impoverished but contented country cousin, Australian banks and credit unions have many differences and much in common.

The banks are like the Town Mouse: living fast-paced and worldly city lives. Over recent years, the banks have been splashing out hugely on e-commerce, attracted by the promise of lower costs, greater access to customers and greater flexibility in service offerings to those customers. Their level of sophistication is high. But while finding the money for such ventures seems to come easily enough, not everything is rosy in their high-rise city apartments. With consumers increasingly seeing them as greedy and rapacious, the banks must also pour squillions into one of their abiding challenges, the need to get closer to their customers.

The credit unions are like the Country Mouse: friendly, hard-working but indigent. With far less money to burn, they are nonetheless being forced to offer e-commerce to meet high customer expectations fuelled by the banks, with far fewer resources and without the ownership of the Internet service technology and infrastructure enjoyed by most of their city cousins. However, if their rural barn fails to offer the same mod cons as their cousin's city high-rise, then like the Country Mouse who valued rural safety and tranquillity above the superficial attractions of the urban lifestyle, credit unions have their own areas of pre-eminence. For one thing, they already know their customers inside out and have an intimate relationship with them via years of delivering friendly face-to-face service across 913 branches Australia-wide.

Credit unions have been operating in Australia since 1946 as democratic, member-owned financial institutions. Since each member is simultaneously customer and shareholder, customer satisfaction is unsurprisingly paramount. However, while the concept of mutuality may be strong, and there is no pressure to deliver a return to shareholders every year, credit unions are increasingly realising they need to make a profit in order to invest it back into the business to make it grow.

"There's an underlying feeling that as long as you don't make a loss, you make a profit, and that's okay," says Credit Union Services Corporation (Australia) Limited (CUSCAL) general manager industry technology services Paul Ramsden. "But while the size of that profit doesn't have to be in the same realm as some of the banks are presently making, you still have to make a profit. I think that's a slight mindset change for some of them - some of them are quite uncomfortable with that."

Increasingly, making that profit and getting a significant share of the spending of their membership base means taking business away from the banks - their city cousins with the deep pockets and access to the latest and best technology.

"We want the members that we've got to view their credit union as an institution that they're willing to have as their major financial institution," Ramsden says. "Right now a lot of them view their credit unions as something to put their salary in or to join when they join a company, but not a place to go for a mortgage or financial advice."

Threats and Opportunities

The rapid growth in e-commerce activities is gradually transforming the way financial institutions operate, the products and services offered and the distribution channels used. The use of new electronic distribution channels and the resulting increased competition has led to a greater focus on reducing costs, changes in distribution strategies and increased dependency on information technology and telecommunications (IT&T).

At the same time, the National Office of the Information Economy (NOIE) points out more people are becoming disenchanted with the service they receive from banks. Recent research confirms many bank customers are having difficulty coming to terms with the "new banking culture" which they perceive as being too complex and impersonal. They feel that banking has become dominated by processes and systems and allows little room for personal interaction. Banks are viewed as businesses concerned with their own interests and remote from the needs of the customer. Here credit unions undoubtedly have the edge.

Ramsden says the service available from credit unions is so personal it's like offering private banking to the masses. Some credit unions are so small they know their members individually. And their customers love them for it.

"If you look at customer satisfaction levels, we're normally up around about 80 per cent in terms of customer satisfaction in all the surveys that get done. The banks are probably in the 40s to 50s," Ramsden says. "We've got a fantastic customer satisfaction rate, but we're just not converting that into share of wallet. We need to shift the paradigm a little bit and really differentiate ourselves from the banks as offering that service. We're really strong in our understanding and knowledge of our customer base, but I think we need to leverage that to bring service to those people in a way that's different to the banks."

The trouble is that as appealing as those personal services are, customers still want to deal with their financial institution in the way that suits them best; today that means having multiple delivery channels because they can get them elsewhere. Ramsden says unless credit unions offer an equivalent service to the banks they can find it difficult to maintain a proper relationship with a customer.

"It's okay having a relationship," he says, "but if all they do is come to you for maybe a car loan, a personal loan, or maybe a cheque account because you're cheaper on the fees, it's difficult to turn a profit."

Most credit union members also have a bank account, he says. That means most of them have experienced online banking services from the banks and do compare what credit unions have to offer with that. No matter what you say to such customers, they want to know why their local credit union hasn't got exactly the same as the majors.

Playing Catch-Up

Technologically speaking, credit unions are undoubtedly coming from behind. A recent Australian Prudential Regulatory Authority (APRA) survey found the banks were ahead of the other financial institutions in using all four electronic distribution channels to reach both existing and new customers. Building societies and credit unions had not adopted the new distribution channels (especially the Internet) as quickly as the banks, but were beginning to move into these areas as well.

The impetus of financial institutions offering a wide range of financial products and services through electronic distribution channels appears unstoppable, helped by improvements in technology and security and by the rapid growth in usage of the Internet. A handful of credit unions are up there with the best of them; but others still struggle to offer basic online services like Internet banking.

Both demand and take-up of the services on offer is just as uneven. Credit unions not only span the nation, they're frequently the only providers of financial services in many rural areas. About one in five Australians belongs to a credit union. Altogether that makes almost 3.6 million credit union members in Australia, putting their combined customer base second only to the Commonwealth Bank's and making credit unions as a group bigger than the other top three banks combined. In addition, credit union membership has increased by nearly half a million over the last five years.

Ramsden points out that credit unions operate in numerous niches. In some - such as the credit unions for IBM and BP employees, for teachers and for public servants - most members have access to the Internet at least at work, so levels of take-up are high, as is demand for fairly high levels of service.

On the other hand, some credit unions have mainly rural members or members who are predominantly blue-collar workers. Here neither take-up nor demand is so great.

"So we've experienced interesting demand: from one end of the market where we've got highly technical people who insist on leading edge-type products, to the other end with far more basic requirements."

Catering for all regardless of demand is CUSCAL, set up and owned by most credit unions as a supplier and aggregator of services to the Australian credit union movement. CUSCAL's services include liquidity management, institutional and retail banking, insurance, public affairs, treasury, mortgage securitisation, industrial relations, research, training, information technology, and financial management and planning.

Ramsden says that for many credit unions delivering those services has been a challenge, but that Internet banking is now such a primary differentiator that any credit union without it is certain to suffer badly. "I think you would lose customers right now if you didn't have at least a reasonable product capable of doing the basic transactions on the Internet."

"On the other hand, I don't think we will lose customers to the banks because we are investing quite a lot in e-commerce," he says. "I think right now our Internet banking offering is as good as the banks, and in some instances you can do more on it than you can do on the bank's. I think it's some of the more peripheral stuff that the banks are offering - like equity trading and [the like] - that may differentiate them a little bit. That's something we're also looking at.

"So right now we're not at a competitive disadvantage - I think we're keeping up."

It's All in the Delivery

As the finance world embraces the emerging e-economy, Australian credit unions are increasingly making use of new cost-effective forms of delivery. A number of initiatives from CUSCAL are allowing credit unions to offer new ways of providing online services to their members while receiving products and services from CUSCAL over the Internet.

One of the most important offerings is electronic clearing and settlement. With credit union members moving more towards electronic banking, and the call on this service increasing rapidly over recent years, CUSCAL has implemented a new electronic payment system that will form an integral part of its payment service.

In February this year, then IT subsidiary Corvis began rolling out a new e-commerce solution for credit unions, known as CorvisFlow. Ramsden has positioned the product suite as the foundation of a long-term technology strategy for credit unions.

"Credit unions more than ever need IT systems that support them in re-engineering their work processes to reduce operational costs and improve and extend service to their members.

"They also require a cost-effective way to deliver a whole range of services via the Internet. [In recognition of] the investment that credit unions have made in their traditional core banking system, CorvisFlow will enable credit unions to continue to leverage this investment. [At the same time, this will give] them a technology infrastructure capable of providing services to their members from a variety of applications," he says.

In June, CUSCAL launched Internet BPay to credit unions following successful pilots at Police and Nurses Credit Union in Western Australia, CPS in the ACT and Advantage Credit Union in Victoria. CUSCAL has also announced the formation of a new e-commerce-based insurance company for credit unions and their members, called finsure.australia. It is set up to amalgamate the resources of three companies to provide corporate and consumer insurances to 200 credit unions in an e-commerce environment.

Meanwhile, CUSCAL is keeping pace with the banks and other financial institutions by creating technology for credit unions to offer portal sites to their members. A feature of portals is that they allow members to customise links and information on their credit union's Web site. Called My Credit Union, the portals are currently being piloted at Railways Credit Union in Queensland and Advantage Credit Union in Victoria.

Time to Brand

With e-commerce at the top of most credit unions' agendas, CUSCAL has recruited Dhun Karai, formerly with the Commonwealth Bank, as general manager e-commerce. Her job is to develop an e-commerce strategy focused on helping credit unions differentiate themselves and create greater brand awareness. Brand awareness, Ramsden says, is something credit unions currently lack.

"Somebody said to us: Â'You guys are the best-kept secret around. Why are you not out there taking over Bendigo Bank's base?' "Bendigo Bank count themselves as a community bank, when whatever you say, Bendigo Bank is still a bank. Where we have that space already, we shouldn't be allowing [the likes of] Bendigo Bank to cut us out of it," Ramsden says.

Credit unions must also constantly encourage their members to use more of their services so that they can continue to grow their business.

"It's not good enough to sit back and say: Â'Well, given the personal level and the encouragement we give to our members to maintain personal contact with us, we can invest less in this delivery channel'. We can't, because there is an expectation now that you've got to have this whether you like it or not," Ramsden says The problems for credit unions, he says, are finding the investment dollars to do the work and to get [the technology] right the first time. The large banks can occasionally afford to make multiple bets and to live with the resulting occasional failures. Credit unions don't have that luxury because they just don't have the investment dollars the banks have.

"If you take the industry as a total, if you take [the 200 plus] credit unions together, we probably own about $24 to $25 billion in assets. Now I don't know what [the Suncorp Metway figure] is but I'm guessing it's around that level. So in total we are about the size of a second-tier bank. "And with e-commerce they're facing a real challenge. If you look at the amount we have to spend to earn a dollar in revenue, it is somewhat higher than the banks. So [CUSCAL] has got to look at ways of helping [credit unions] lower their cost base through things like aggregation, outsourcing and shared services."

All Together Now

When it comes to aggregation, CUSCAL has another vital role to play. Ramsden says there are probably half a dozen different core banking systems in use across the industry. Now credit unions must work on rationalising those systems, since each one costs money to maintain and each means the movement is duplicating its efforts across multiple core banking applications.

That will mean overcoming a lot of politics, he says - but the effort will be worth it.

"What's important in this business is for credit unions to understand where they're going to be in the next three to five years: where they see themselves competing in the marketplace and what their business is going to look like. What is it they're going to be? How are they going to compete in a changing environment?

"So we're trying to tell them that in order to do some of the things and position them in the way that they see themselves operating, we need an underpinning IT infrastructure. The only way for us to deliver that infrastructure is probably through a common IT strategy. In other words, that we begin to share and we begin to standardise, and that we start adopting more of the old 80:20 rule. That is, previously we tried to deliver solutions to them that met 100 per cent of their needs; [however, this is] quite costly to do, so I think we've got to get back to the old idea of saying, well, 80 per cent is good enough.

"So we're selling them very much on saying: this is where your business is going, this is the IT platform that you need in order to be able to deliver against that requirement. Particularly on e-commerce.

"If you look at delivering an e-commerce capability, if you have to interface that e-commerce solution into multiple back-end systems, [it means] it costs you a lot of money to do that, and it means you're slow to market. And one thing we have got to be good at is being quick to market, as an organisation. So we should be able to make decisions very quickly and implement very quickly, and that should be where we can compete, where we can be nimble and make offerings quickly. But given that we've got multiple core banking systems out there right now, that slows us down."

In time the board, comprising credit union general managers plus some independent directors, will recommend a chosen platform. The country cousin credit unions will then have to start to move as a group towards providing the amenities their city-slicker relatives have been offering for some time.

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